IFRS 17: What will change?

Brokers place a client’s risk with a particular insurer based on a number of factors—one of which is the company’s financial performance. International Financial Reporting Standard 17 (IFRS 17) is going to change what that performance look like.

IFRS 17 is a new accounting standard governing insurance contracts set out by the International Accounting Standards Board (IASB), and it means brokers will need to learn how to interpret a brand new financial reporting format. That’s because the biggest change that will occur when IFRS 17 takes effect on January 1, 2021 will be how insurers’ financial results are presented.

Hudson Lopez, a partner at KPMG in Canada, says, “one area [that will change] is the presentation of the income statement. Today’s insurers are used to seeing premiums written as one of the volume metrics that appear on the face of the financial statement, and that will disappear going forward.”

Instead, he says, “The concept of insurance contract revenue will be disclosed, which has a different meaning to premiums written, which is a volume metric, [measuring] how much business is written in a given year.”

Another change will be the presentation of discount rate changes relating to insurance liability. “Today, changes in discount rates are reflected within the movement in the insurance liability line, whereas going forward the requirement is to have the discount rate separated out and shown either below the underwriting income line or in the other comprehensive income. Insurers will have a choice on where to present the changes in discount rate.”

This is because “under the new standard, there’s a lot more granularity, so you may see additional information being disclosed. And, depending on certain groupings of contracts, those would have to be disclosed separately.”

By that, Lopez is referencing the fact that insurers will have to aggregate their contracts into three groups: contracts that are onerous (unprofitable), those that have no significant possibility of becoming onerous, and any remaining contracts in the portfolio. “The big issue for P&C insurers is the concept of grouping of contracts. The intent is to ensure that, if insurers have unprofitable contracts, that they are tracking that separately and reflecting those losses in the income statement.”

For the insurer, this means IFRS 17 will impact the organization on a large scale. “Potentially, systems changes, data, how contracts get aggregated today versus how they need to group them going forward – all those considerations need to be followed through, which will have impacts on the people, processes and, of course, systems as well.” However, for brokers evaluating insurers, the new standard could provide additional visibility relating to onerous contracts.

Most P&C insurers have an advantage, says Lopez. IFRS 17 offers a bigger challenge for life insurers, where policy durations are much longer. That will prevent them from using the simplified approach allowed under IFRS 17, thereby making the implementation more complex and challenging. “For [P&C insurers], most of their contracts are going to be one year or less…yet there’s still issues they need to deal with as well.”

A January 1, 2021 deadline seems far away, but there are other deadlines that will arrive sooner. “Insurers are going to have to restate the comparatives in 2020, [which has] an impact on the open balance sheet on January 1, 2020,” lopez points out. “If you work backwards from that in terms of adopting a standard, there’s not a lot of time,” especially for insurers with longer policy contracts—like life insurers.

Canadian Insurance Top Broker contacted a number of Canadian insurance companies for comment about how their results reporting would change under the new standard. All of them declined to comment, with a couple noting it was still too early in the process to provide meaningful information. Lopez, too, did not have much to offer when asked what tips he might have for brokers in preparing for the new accounting standard, other than suggesting that brokers become educated on how to interpret IFRS 17 as information becomes available.

“There are a lot of upcoming conferences and education sessions that a number of insurers, and I suspect even brokers, are making sure they attend. In a few months, I expect we’ll start to get a bit more clarity on the exact issues, [but] I expect it’ll be next year at the earliest before we truly start landing on what this will mean.”